Industrial assets could be a good inflation hedge

Industrial assets could be a good hedge against ongoing inflation pressures but not all commercial assets will be as effective according to an expert.

Ray White Commercial Head of Research, Vanessa Rader said commercial property was often perceived as a good hedge against inflation but the current environment is difficult to navigate.

“The current inflation rate of 6.1 per cent will be a test for some landlords, in particular assets which have recorded increased vacancies as these will be challenging,” Ms Rader said.

“Asset classes such as industrial, with high occupancy and growth in demand notably from the freight, transport, and warehousing sectors are likely to weather the storm given they have enjoyed strong levels of rental appreciation which can, to some extent, counteract these rising rates. 

“Many of these increased costs are heavily passed on to the consumer with the freight and transport industry also recording a strong uptick in costs due to rising fuel, wages and accommodation expenses. 

“Road freight is now up 8.3 per cent over the last year while postal and courier services have grown 8.1 per cent over the same period.”

Ms Rader said tourism assets would have a hard time passing on rent increases given the recent problematic market.

“Tourism assets have had a difficult two-year period with border closures, lockdowns, and reduced occupancy limits, however, an increase in domestic and international travel has seen the service industry raise prices,” Ms Rader said.

“Again, plagued by rising wages, accommodation costs have grown by 16 per cent over the past year, while growing food prices, labour shortages, and supply chain issues have seen cafes, restaurants and takeaway food increase by 6 per cent.”

According to Ms Rader, office assets are also likely to struggle to pass on higher rents in the current environment.

“As office vacancies are up across most of the country and WFH now expected by a high percentage of the population, we are seeing tenants reducing their office footprints or only leasing adequate space, allowing WFH to cater for any growth,” she said.

“As a result, sublease space continues to climb and incentives will remain a key strategy to fill space. While rental appreciation is unlikely in the short term, there are opportunities for landlords to be more flexible or innovative in their lease terms and conditions to maximise future escalations. 

“However, low yields, which were on offer over the last couple of years, appear unsustainable given the changing spread to bond rate.”

Ms Rader said with retail vacancies high, there was little sign of rental growth on the horizon. 

“For retail, convenience and food retailing have been the segments showing the most increase in turnover, followed by services; hairdressing and dry cleaning being key industries, which have seen price rises of 4.6 per cent and 8.6 per cent respectively,” she said.

“There have been a growing number of property owners repurpose their assets (STCA) to allow a broader range of uses such as growth sectors of childcare, medical and even co-working to potentially increase their assets earning potential to hedge against this high inflationary environment.”

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Rowan Crosby

Rowan Crosby is a freelance journalist specialising in finance and real estate.